What is a 403(b) retirement plan?

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Quick Answer

The U.S. Internal Revenue Service describes 403(b) retirement plans as plans that allow an employee to defer a percentage of his pre-tax income into an account where taxes remain deferred until distribution. These plans work similarly to the 401(k) plans offered by for-profit organizations, but 403(b) plans are only available to employees of public education systems, churches and tax-exempt charities and non-profits.

According to the IRS, 403(b) plans allow an employee a high level of flexibility when determining how much to contribute to his retirement savings accounts. Some employers elect to fully or partially match an employee's contributions, but they are not required to do so. An employee may contribute up to $17,500 a year, but this amount is lowered if he also contributes to other types of retirements accounts, including Roth accounts and 401(k) plans.

The IRS states that one of the disadvantages of a 403(b) plan is that an employee's investment options are limited to those selected by the employer. Some of these investment options also come with high administrative fees that cut into the account's total profit. An employee is allowed to withdraw from his 403(b) account when he reaches age 59 1/2. At the time of withdrawal, taxes are assessed on the account. Withdrawals from these accounts are also permitted if an employee loses his job, is disabled, dies or experiences a qualified financial hardship.

Related Questions

Valid reasons for a hardship withdrawal from a 403(b) retirement plan include medical expenses, education expenses, funeral expenses, purchase of a primary home, repairs to a primary home or payments to prevent eviction from a primary home, reports the IRS. Purchase of personal property does not usually qualify.

A 457(b) plan, also known as deferred compensation, is a retirement and savings program for state governments, local governments and certain tax-exempt organizations that allows employees to defer a portion of their salaries into specific investment accounts, such as a Roth IRA. Employees enroll in 457(b) plans through their employers.